Secretary of Labor, and all the recommendations of Federal and State advisory councils are bound to be rather ineffectual. Experience during the past two decades clearly shows that strong countervailing forces in the way of Federal inducements or Federal standards will be necessary to remedy this structural defect.

Under the present setup the politics of unemployment compensation in the States is a prime factor. It is no accident that, of the 18 States with rightto-work laws, 14 refused this year to participate in a program of extended benefits either on its own or under the Temporary Unemployment Compensation Act.

REMEDIES FOR STRUCTURAL DEFECTS

The tax incentive contained in the Federal law, which encourages States to maintain low benefit standards, can be countered or partially corrected by any one of a variety of measures.

One type of corrective is to write into the Social Security Act minimum standards with respect to tax rates and benefit levels and duration, with which a State would have to comply in order to receive Federal approval of its law for tax offset purposes.

Another avenue would be to expand the tax base in one or more ways. That could and should be done, regardless of other measures, to bring the employers' base to at least $4,200 in wages a year. Also a good case can be made for levying a uniform Federal employee contribution of one-half of 1 percent or 1 percent, which would be subject to a State tax offset.

As for raising the employer tax base in the Federal act to more than the $3,000 figure that has prevailed for the past two decades, I am astounded that the Federal Advisory Council recommended against such action during the 195657 fiscal year. Some of the reasons the Council offered in support of its recommendation to continue to exempt a growing fraction of payrolls-over one-third now-seem to me to be invalid. Certainly in the minds of some people, including State legislators, there is a relation between the size of the tax base and the size of benefits. A total of $3,000 a year is about $60 a week and half of that is $30-roughly the current benefit average and approximately the maximum in a majority of States. Also, the Council overlooks the fact that a higher tax base will improve the contributions-benefits ratio for firms that place a heavy drain on State funds. If this matter were so unimportant and inequitable as the Council implies, it would hardly seem likely that five States would already have raised their tax bases to $3,600 or $4,200, even in the absence of any Federal action. The fact of the matter is that it is more inequitable to keep the tax base where it is. Also with the Reed bill, any additional funds coming into the Federal Government from a larger tax base would not be lost to unemployment compensation and, indeed, may be needed at least in part, at the Federal level.

Another defect-remedying measure would be to provide some pooling of risks through reinsurance at the Federal level. Such a measure could provide an incentive or inducement for States to come under reinsurance, but they could elect to stay out if they wished. Dean Brown has explained one possible program in his speech last night.

The case for such a reinsurance program rests not only on interstate competition in low standards but also squarely on the fact that recession unemployment is heavily concentrated in certain States. Those are the States whose industry is well represented by manufacturing lines like metals, machinery, automobiles, and other consumer durables.

Where the incidence of unemployment is concentrated so that certain States experience an excessive and prolonged drain of unemployment benefits during a national business recession, there should be some national sharing of the cost in a State-say of that portion of the total benefit payments in any quarter that exceeds 2.7 percent of covered taxable payroll in the State, as Dean Brown suggests.

So heavy and unfair will employers' taxes become in some States relative to others as a result of the 1957-58 recession that, in the absence of some reinsuranc program, the demand for a purely national system will increase. States like Michigan, Pennsylvania, and New Jersey cannot be expected to bear the full brunt of the unequal incidence of unemployment and the industry undermining consequences of competition by States with low benefit standards. What we have now is a kind of State by State experience rating, with not uniform but widely varying State benefit standards. That means for instance, that a textile

or furniture manufacturer in Michigan, New Jersey, Pennsylvania, or Rhode Island, is at a disadvantage, unemployment taxwise, compared with a competitor having identical unemployment experience in Virginia, or Arkansas, or in another of the low-standard, low-unemployment States.

A loan fund is no answer to this sort of a problem. It only postpones and builds up the competitive disadvantages. New firms, in deciding location, can figure out in advance the relative unemployment tax disadvantages of location in particular States.

Such an unfair and unsound setup prevents unemployment compensation from performing its proper role. And it will generate increasing demands for structural changes in the public system and will stimulate more and more resort to private supplementation. The S.U.B. plans, such as those in steel and autos, have the distinct advantage that they cut across the differentials in State benefit and tax levels. Nationwide firms have a national, not a State-by-State contribution rate, and the benefits are on a national, not a State-by-State standard. Unemployment compensation thus is made completely neutral with respect to plant location as it should be. It should not be an incentive and an instrument for preventing improvements in unemployment compensation recommended by a Federal administration, with national interests in mind.

STATE POLITICS IN UNEMPLOYMENT COMPENSATION

At the State level, political pressures of various sorts serve to prevent adequate benefit levels. Farmers, of course, desire a plentiful supply of low-cost farm labor, and assume that the level of unemployment benefits affects the seasonal availability of labor for harvesting and other purposes. Business concerns and their associations hammer away at the lower unemployment taxes paid by competitors in other States. The campaign that they put on in terms of flooding legislators and Governors with letters whenever increased benefits are proposed is well known in States such as New Jersey.

Benefit improvements in unemployment compensation are also retarded by considerations relating to other State programs. In the minds of legislators and Governors, unemployment benefit levels are often tied up with workmen's compensation benefit levels. In States like New Jersey they are also bound in with benefit levels under temporary disability insurance. Legislatively it may not be possible to improve one without doing the same for the other programs. Thus, a change in unemployment benefits brings with it not only its own added cost, but that of the other programs as well. In the terms of the economist, the marginal cost of improved unemployment benefits is, therefore, large-at least it seems so to employers.

For additional reasons, State legislatures are not well adapted to provide adequate unemployment benefits or to keep benefit levels up-to-date with changes in wage levels. Not only are State legislatures badly unbalanced in their overrepresentation of rural inhabitants, but they are composed of parttime legislators who earn most of their income in other ways and meet only briefly and rather infrequently on State business. In some States the legislature convenes only 60 days every other year. Even in New Jersey where the legislature meets frequently throughout the year it is difficult for individual legislators to spend much time or attention on a matter like unemployment compensation. Much of the law is so technical that it is difficult to understand the full implications of proposed changes; and newspaper stories often give the false impression that all recipients will receive any new weekly maximum.

Under the circumstances, it would be highly desirable for the weekly benefit ceiling in each State to be adjusted annually for changes in average earnings in covered employment, as is provided in the law in Utah and Wyoming and has been recommended by the Director of the Federal Bureau of Employment Se curity. Unfortunately, as long as the low-standard States have tax rates only one-third as large as those of many high-standard States and as long as unemployment benefits are tied up with workmen's compensation and other benefits, there seems little likelihood of the widespread adoption of such a sliding-scale method of unemployment benefit adjustment. Obviously, the State legislature does not lose the power to exercise control over benefit levels under such an arrangement, but the States are fearful of getting too far out of line and losing industry in interstate competition. Until this basic defect of unemployment compensation is remedied, State politics and State considerations will tend to outweigh national interests in the program.

Faced with that sort of obstruction, the findings of benefit research are of little influence or avail. Tax considerations become the determining factor, and niggardly States like Virginia serve as a check on benefit progress elsewhere. Certainly we need more research in unemployment compensation. In view of the size of the total program, far too little is being spent on analysis to provide answers to many important issues in our unemployment insurance program. But the present setup is not conducive to basic research. Scholars are not likely to be attracted in significant numbers to make studies when there is little prospect that the results of their studies will make any real difference in terms of State legislation.

CONCLUSION

To sum up, the structure of unemployment compensation needs some remodeling.

A program of reinsurance is essential.

Incentives and standards need to be provided to protect the national interest in unemployment compensation as a built-in stabilizer.

There is a need to remedy obsolescence in eligibility as well as benefit standards, and to improve benefit duration in line with the needs as revealed in exhaustion studies.

More basic research is required.

All these advances depend on remedying the structural defects that permit national interests to be badly submerged by State political considerations and that place unfair tax burdens on those individual States that are most affected by recession unemployment, which stems largely from interstate factors.

REFERENCES

1. George F. Rohrlich, "Measuring the Impact of U.I. Benefit Payments in a Recession," The Labor Market and Employment Security, July 1958, pp. 5-10.

2. See "State Unemployment Insurance Legislation, 1957," Social Security Bulletin, January 1958, p. 11.

3. A digest of the survey of unemployment compensation beneficiaries in Pittsburgh, Pa. Study conducted by Duquesne University, U.S. Department of Labor, October 1955; R. B. Beasley, "Tampa-St. Petersburg Area Benefit Adequacy Study" and "South Carolina's Beneficiary Study," Employment Security Review, August 1958, pp. 7–13.

4. Experience of claimants exhausting unemployment insurance benefit rights, January-March 1956, 14 selected States, U.S. Department of Labor, April

1957.

5. Paul Mackin, "Postexhaustion Labor Market Experience for 1956 and 1958," Employment Security Review, August 1958, pp. 13–15.

6. See Miriam I. Civii, "Jobless Pay Offsets to Wage Declines," The Conference Board Business Record, XV (March 1958), pp. 96 ff.

7. See George F. Rohrlich, op. cit.

The CHAIRMAN. Our next witness is the director of unemployment compensation for the Associated Industries of Massachusetts, Mr. Bertram F. Collins.

STATEMENT OF BERTRAM F. COLLINS, DIRECTOR OF THE UNEMPLOYMENT COMPENSATION DEPARTMENT OF THE ASSOCIATED INDUSTRIES OF MASSACHUSETTS

Mr. COLLINS. Mr. Chairman and members of the committee, I have a prepared statement, which I believe is before you, to which I am going to refer. I suggest that there is a summary sheet attached to it, to which I will not refer, but I request that it be made part of the record.

The CHAIRMAN. Your entire statement, including your exhibits, will be made a part of the record, without objection.

Mr. COLLINS. Thank you, sir.

My name is Bertram F. Collins; I am director of the Unemployment Compensation Department of the Associated Industries of Massachusetts and my business address is 2206 John Hancock Building, Boston, Mass. The AIM Unemployment Compensation Committee has authorized me to appear before the House of Representatives, Committee on Ways and Means, in these hearings and offer this statement in opposition to proposed legislation for Federal unemployment compensation benefits standards.

The Associated Industries of Massachusetts is a voluntary association representing manufacturing concerns doing business in the Commonwealth of Massachusetts. We represent approximately 2,000 manufacturers comprising a majority of the industrial payroll of the Commonwealth. Approximately 72 percent of our manufacturer members have less than 100 employees. Thus, a majority of our manufacturer members may be placed in the small business category. AIM opposes the proposals before this committee for Federal unemployment compensation benefit standards on the basis of:

I. Principle of States rights.

II. Current status of the Massachusetts employment security pro

gram.

III. Current status of the Massachusetts industrial economy.

With respect to principles, such proposals usurp the inherent right of State legislatures to modify and maintain our State employment security systems of 20 years' standing on the basis of the needs and economy of each individual State. There are many unique and varying economic factors in each State and region of our vast country which cannot be standardized or equalized by Federal legislation. It is these unequal factors which dictate the needs and determine the varying financial ability of the employers of each State to pay for an unemployment compensation program. Therefore the Associated Industries of Massachusetts is unalterably opposed to any Federal statute which, without regard to such variances in State economies, compels State legislators to add unreasonably to the cost burden of employers by enacting employment security legislation which to this date not a single State legislature in the Nation has considered either necessary or financially sound.

With respect to the Massachusetts employment security program, the proposals before you are so unrestrained in their liberality that it is believed that insufficient consideration has been given to the already costly and over-liberalized programs of such States as Massachusetts and other leading industrial States. Proposals before you would boost maximum benefits and maximum duration of payments by at least 50 percent in Massachusetts; allow a claimant to draw 39 weeks of benefits for 20 weeks of work. Such suggestions, if forced on Massachusetts, would bankrupt the Commonwealth's program and destroy experience rating in less than a year. A maximum uniform tax rate of 2.7 percent wouldn't finance such unrestrained liberalization even in an average year such as 1957.

Use of the term "standard" in describing the various proposals before this committee misleads the casual observer into thinking that the suggested Federal laws would create equality among State programs. All of these proposals not only force a liberalization of State laws currently less advanced than our Massachusetts statute, but also

push benefits, duration, and eligibility provisions in the most liberal State far beyond present levels.

Without question these proposals would take a currently solvent system, supporting itself without Federal handouts, and blast it into insolvency and force it to become dependent on Federal funds. AIM is obviously opposed to any such scheme.

To favor the application of such a suggestion in Massachusetts at a time when expenditures under the existing program already threaten the destruction of experience rating and the eventual annihilation of reserves would be decisedly unsound from either a social or economic aspect.

Exhibit 1, attached, presents facts about the curent Massachusetts employment security program which are based primarily on statistics from the Massachusetts Division of Employment Security and the U.S. Department of Labor.

Let me refer to certain key facts from exhibit 1 about the Massachusetts employment security law which will show why it is the most liberal of any such law in the country and why Massachusetts employers in 1958 had a higher average unemployment tax rate than employers in 10 of the 13 leading industrial States.

With respect to exhibit 1, consider, for example, that Massachusetts spent more for unemployment compensation benefits in 1958 than any other previous year $124 million, exclusive of some $22 million of additional funds from Federal loans for extended benefits. This 1958 expenditure was almost twice as much as was spent in 1957 and about three times as much as was spent in 1956.

Massachusetts employers, for example, have consistently had an average unemployment compensation tax rate higher than the national average in every single year for the last 11 years. Yet I believe it is a tribute to the soundness of the Massachusetts program that through 21 years' experience, encompassing two depressions, an employer-financed State-administered employment system remains solvent today and continues to provide a greater percentage of weekly wage loss replacement for its beneficiaries than any other Federal or State program.

Consider, for example, that the Massachusetts Legislature has consistently increased benefits to keep pace with the increasing average weekly gross wage in the State. And there is a table in exhibit 1 to which I direct your attention.

Actually, there is no maximum benefit rate in Massachusetts, other than the average weekly wage, for the combination of basic weekly benefit and unlimited dependency allowances allows the claimant to actually draw in benefits in an amount equal to his average weekly

wage.

With respect to other provisions of the statute, the Massachusetts Legislature has modified the employment security law in every single year since 1935, except for 3 years, 1940, 1942, and 1944, and I believe has thus realistically demonstrated its ability to relate the program to the changing needs and economic conditions of the Commonwealth.

Consider, for example, the more liberal provisions of the law in effect during the first quarter of 1958, a period of high unemployment, which resulted in a record benefit expenditure during that quarter, which was almost double the amount expended in the first quarter